Price gouging-moral insights from economics

Dwight Lee in the current issue of Regulation magazine offers “The Two Moralities of Outlawing Price Gouging.” In the article Lee endorsed economists’ traditional arguments against laws prohibiting price gouging, but argued efficiency claims aren’t persuasive to most people as they fail to address the moral issues raised surrounding treatment of victims of disasters.

Lee wrote, “Economists’ best hope for making an effective case against anti-price-gouging laws requires considering two moralities—one intention-based, the other outcome-based—that work together to improve human behavior when each is applied within its proper sphere of human activity.”

Intention-based morality, that realm of neighbors-helping-neighbors and the outpouring of charitable donations from near and far, is good and useful and honorable, said Lee, who term this as “magnanimous morality.” Such morality works great in helping family and friends and, because of the close relationship, naturally has a good idea of just what help may be needed and when and where.

When large scale disasters overwhelm the limited capabilities of the friends and families of victims, large-scale charity kicks in. Charity is the extended version magnanimous morality, but it comes a knowledge problem: how does the charity identify who needs help, and what kind, and when, and where?

The second morality that Lee’s title referenced is the morality of “respecting the rights of others and abiding by general rules such as those necessary for impersonal market exchange.” This “mundane morality” of merely respecting rules does not strike most people as too compelling, Lee observed, but economists know how powerful a little self-interest and local knowledge can be in a world in which rights are respected. Indeed, the vast successes of the modern world–extreme poverty declining, billions fed well enough, life-expectancy and literacy rising, disease rates dropping–can be attributed primarily to the social cooperation enabled by local knowledge and voluntary interaction guided by prices and profits. The value of mundane morality after a disaster is that it puts this same vast power to work in aid of recovery.

The two moralities work together Lee said. Even as friends and families reach out in magnanimous morality, perhaps each making significant sacrifices to aid those in need, the price changes produced by mundane morality will engage millions of people more to make small adjustments similarly in aid. A gasoline price increase in New Jersey after Sandy’s flooding could trickle outward and lead gasoline consumers in Pittsburgh or Chicago to cut back consumption just a little so New Jerseyans could get a little more. Similarly for gallons of water or loaves of bread or flashlights or hundreds of other goods. Millions of people beyond the magnanimous responders get pulled into helping out, even if unknowingly.

Or they would have, had prices been free to adjust. New Jersey laws prohibit significant price increases after a disaster, and post-Sandy the state has persecuted merchants who it has judged as running afoul of the price gouging law.

Surely victims of a disaster appreciate the help that comes from people who care, but they just as surely appreciate the unintended bounty that comes from that system of voluntary social interaction guided by prices and profits called the market. Laws against post-disaster price increases obstruct the workings of mundane morality, increase the burden faced by the magnanimous, and reduce the flow of resources into disaster-struck regions.

Perhaps you think that government can fill the gap? Lee noted that restricting the workings of mundane morality increases the importance of political influence and social connections, but adds the shift is unlikely to benefit the poor. On this point a few New Jersey anecdotes may inform. See these stories on public assistance in the state:

We often honor the magnanimous, but we need not honor the mundane morality-inspired benefactors of disaster victims.  While the mundanely-moral millions may provide more help in the aggregate than the magnanimous few, the millions didn’t sacrifice intentionally. They just did the locally sensible thing given their local knowledge and normal self-awareness; doing the locally sensible thing is its own reward.

We need not honor the mundanely moral, but we also ought not block them from helping.

Looking for renewable policy certainty in all the wrong places

From EnergyWire comes the headline, “In Missouri, industry wants off the ‘solar coaster’.” (link here via Midwest Energy News).

A utility rebate program authorized by voters in 2008 is making Missouri into a solar leader in the Midwest. But $175 million set aside to subsidize solar installations is [nearly] fully subscribed … and the same small businesses that scrambled to add workers last year to help meet surging demand are facing layoffs….

Heidi Schoen, executive director of the Missouri Solar Energy Industries Association, said the industry, which has generated thousands of jobs and millions of dollars in new taxes for the state, is just looking for certainty.

“We want off the solar coaster,” she said. “We don’t want to be in this boom-and-bust situation.”

It is a patently false claim.

If they wanted off of the boom-and-bust policy ‘solar coaster,’ they’d get off. They could go do unsubsidized solar installations for example, or if (when?) that proves unprofitable get work doing something else. By their actions they signal that they prefer the booms-and-busts that come with reliance on politicians for favors.

ICLE letter to Gov. Christie opposing direct vehicle distribution ban: Over 70 economists and law professors

Geoff Manne of the International Center for Law and Economics has spearheaded a detailed, thorough, analytical letter to New Jersey Governor Christie examining the state’s ban on direct vehicle distribution and why it is bad for consumers. Geoff summarizes the argument in a post today at Truth on the Market:

Earlier this month New Jersey became the most recent (but likely not the last) state to ban direct sales of automobiles. Although the rule nominally applies more broadly, it is directly aimed at keeping Tesla Motors (or at least its business model) out of New Jersey. Automobile dealers have offered several arguments why the rule is in the public interest, but a little basic economics reveals that these arguments are meritless.

Today the International Center for Law & Economics sent an open letter to New Jersey Governor Chris Christie, urging reconsideration of the regulation and explaining why the rule is unjustified — except as rent-seeking protectionism by independent auto dealers.

The letter, which was principally written by University of Michigan law professor, Dan Crane, and based in large part on his blog posts here at Truth on the Market (see here and here), was signed by more than 70 economists and law professors.

I am one of the signatories on the letter, because I believe the analysis is sound, the decision will harm consumers, and the law is motivated by protecting incumbent interests.

I encourage you to read the analysis in the letter in its entirety. Note that although the catalyst of this letter is Tesla, this law is sufficiently general to ban any direct distribution of vehicles, and thus will continue to stifle competition in an industry that has been benefiting from incumbent legal protection for several decades.

Information technology has reduced the transaction costs that previously made vehicle transactions too costly relative to local transactions between consumers and dealers. Statutes and regulations protecting those incumbents foreclose potential consumer benefits, and thus do the opposite of the purported “consumer protection” that is the stated goal of the legislation.

See also comments from Loyola law professor (and fellow runner and Chicagoan!) Matthew Sag.

Someone please explain the American Wind Energy Association’s funky electricity price arithmetic

About a month ago the American Wind Energy Association blogged: “Fact Check: New Evidence Rebuts Heartland’s Bogus RPS Claims.” I’m scratching my head a bit trying to understand their so-called facts. The big claim from AWEA:

The eleven states that produce more than seven percent of their electricity from wind energy have seen their electricity prices fall 0.37 percent over the last five years, while all other states have seen their electricity prices rise by 7.79 percent.

The blog post mentions DOE data, and the post links to a report the AWEA assembled titled “Wind Power’s Consumer Benefits” which cites U.S. EIA data on “Average Retail Price of Electricity to Ultimate Customers” (find the data here). The blog doesn’t explain their method and the report is only barely more helpful in that regard.

The AWEA report describes the price suppressing “merit order” effect of subsidized/low marginal cost wind energy, but that is a wholesale price phenomena that doesn’t include various other utility compliance costs, and anyway the AWEA is making claims about end consumer benefits from lower retail prices. The merit order effect only matters to consumers if consumers end up paying lower retail prices.

So I downloaded data from the EIA site and tried to calculate the retail percent change in price for every state over the last five years, then compared the eleven states that AWEA said produce more than seven percent of their electricity from wind energy to the remaining states and DC.

By my simple average, prices in the 11 “wind states” were about 18.8 percent higher in December 2013 than they were in December 2008; prices in the 39 other states and DC were about 5.7 percent higher in December 2013 than they were in December 2008. Now maybe AWEA is doing a weighted average by kwh sold or something different than my straightforward calculation, but they don’t explain it and I can’t reproduce it.

Can you?

The price data from December 2008 and December 2013 for the eleven “wind states” and “Avg-All Others” are:

State Dec-08 Dec-13 Percent change
Iowa          7.10          7.77 9.4%
Kansas          7.01          9.19 31.1%
Minnesota          7.66          9.27 21.0%
North Dakota          6.35          8.03 26.5%
South Dakota          6.93          8.57 23.7%
Oklahoma          6.55          7.14 9.0%
Texas        10.85          8.77 -19.2%
Colorado          8.01          9.48 18.4%
Idaho          5.97          7.91 32.5%
Wyoming          5.68          7.71 35.7%
Oregon          7.24          8.61 18.9%
Avg-All Others        10.60        11.19 5.7%
* Prices are cents/kwh

I can’t help but notice that only one of the 11 wind states (Texas) saw a decline in prices over the time period, and the other 10 wind states actually saw prices increase from December 2008 to December 2009 faster than the overall average of the other states.

So what kind of funky AWEA arithmetic turns (mostly) larger retail price increases in the 11 states into a big consumer benefit?

NOTE: By the way, a sophisticated attempt to address the questions of wind power’s consumer benefits-if any on net-would look at a lot more information than simple average retail rates by states. I was trying to engage the debate on the level presented and even at this simple level of analysis I can’t tell how they got their numbers.

Discrimination in West Virginia price gouging case?

Are West Virginia “outsiders” more likely to be accused of price gouging?

From the March 8, 2014, Charleston Gazette, “Morrisey accused of discrimination in price gouging response“:

CHARLESTON, W.Va. –A Putnam County storeowner accused of price gouging bottled water during the water crisis says Attorney General Patrick Morrisey discriminated against him because he is Lebanese, questioned him unethically and illegally leaked the charge to the media before informing him of it.

On Feb. 14, Morrisey filed suit in Putnam Circuit Court alleging that Achraf Assi’s convenience stores, Hurricane-based Mid Valley Mart LLC, unfairly raised the price of Tyler Mountain Spring Water from $1.59 a gallon to $3.39 a gallon the day after the Jan. 9 chemical leak that contaminated the region’s drinking water.

Morrisey alleged that Assi, who owns the two stores that allegedly sold water at inflated prices, kept the prices higher for a week following the chemical leak.

In this news report the West Virginia Attorney General refers to alleged price gougers as “bad apples.”

The attorney general’s office reported over 150 calls concerning prices during the water emergency and documented 74 cases of increased prices on water and other goods. As of late February, the AG’s office reported issuing six subpoenas and 15 cease and desist letters. Only one price gouging case has been filed subsequent to the water emergency.

So far as I am aware, this is the first time I’ve seen claimed that price gouging laws have been implemented in a discriminatory fashion.

In 2012 I suggested the possibility that price gouging laws could be applied in discriminatory fashion (here and here). In brief, my claim was (1) the laws typically grant some discretion to the state, and any discretion exercised was unlikely to favor “outsider” groups; and (2) enforcement is almost always triggered by consumer complaint and so gives any consumer bias a role in anti-price gouging law enforcement. I’ve also speculated that “outsider” merchants may be more likely to raise prices in response to emergencies, but know of no research on that possibility.

Rent-seeking diary: State dealer franchise laws and Tesla

By now you’ve probably heard that last week the New Jersey Motor Vehicle Commission passed a rule stipulating that automobile sales in the state cannot be direct-to-consumer, and must instead take place via dealer franchises. Tesla Motors was the clear target of this regulation, with its innovative electric vehicles and direct-to-consumer sales model. New Jersey is not the first state in which this regulatory tangle is occurring; last summer Tesla ran into dealer franchise law hurdles in Virginia and New York, as I discussed here in July.

The SF Gate blog post above notes:

Tesla said the administration had “gone back on its word,” claiming two top Christie aides had agreed not to move forward with the regulation. …

But a Christie spokesman rejected the accusations of a double-cross. The regulation, he said, won’t prevent Tesla from seeking legislation to allow direct sales in New Jersey.

Note that the political establishment response is to engage with the political process to get legislation passed to allow direct sales. What would such engagement entail? Will it entail the kind of crony relationships that have led to the entanglement of so many businesses and politicians in the past — will Tesla have to find its own politicians to fund in the hopes of a favorable legislative outcome? If so, that will vindicate my sad statement last July:

When innovative and environmentally correct meets the crony corporatism of existing legislation, is the entrenched incumbent dealer industry sufficiently politically powerful to succeed in retaining their enabling legislation that raises their new rival’s costs?

In New Jersey, it appears that the answer is yes, at least for now, as established car dealers cling to their old business model and hope to avoid being disintermediated. Tesla has thus far avoided the crony trap, and has instead focused on relabeling their New Jersey showrooms as “galleries” while encouraging customers to purchase the vehicle online. Will that legalistic sleight of hand suffice to enable an end-run around status-quo-protecting obstacles?

Alex Tabarrok discusses the Tesla-New Jersey case today, and analyzes it very usefully with a brief history of the evolution of state dealer franchise laws and how they served as a Coasean solution to an incentive problem:

Franchising rules evolved in Coasean fashion so that manufacturers could not expropriate dealers and dealers could not expropriate manufacturers. To encourage dealers to invest in a knowledgeable sales and repair staff, for example, manufactures promised dealers exclusive franchise (i.e. they would not license a competitor next door). But with exclusive franchises dealers would have an incentive to take advantage of their monopoly power and increase profits by selling fewer units at higher profits. Selling fewer units, however, works to the detriment of the manufacturer and the public (aka the double marginalization problem (video)). Thus the manufactures required dealers buy and sell a minimum quantity of cars, so-called quantity forcing. Selling more units is exactly what we want a monopoly to do, so these restrictions benefited manufactures and consumers.

Here Alex’s account dovetails with the history that Elon Musk provided in his open letter to the people of New Jersey on Friday:

Many decades ago, the incumbent auto manufacturers sold franchises to generate capital and gain a salesforce. The franchisees then further invested a lot of their money and time in building up the dealerships. That’s a fair deal and it should not be broken. However, some of the big auto companies later engaged in pressure tactics to get the franchisees to sell their dealerships back at a low price. The franchisees rightly sought protection from their state legislatures, which resulted in the laws on the books today throughout the United States (these laws are not present anywhere else in the world).

Musk’s letter is well worth reading in its entirety, as an eloquent and well-argued statement about regulatory and legislative entry barriers that enable incumbent firms to raise the costs of their rivals. He also provides a thoughtful and economically sophisticated (and accurate, I think) explanation for why they don’t want to sell Tesla vehicles through established dealers.

Here Alex adds another political economy detail of the economic leverage of the franchise dealers in the states — they provided jobs and their sales generated a large share of a state’s sales tax revenue, so politicians found it in their interest to shore up the state-level dealer franchise laws to protect the dealers. Thus a set of laws that initially benefitted both producers and consumers has evolved into industry-protecting regulation.

One other theme I’ve noted in the discussion of Tesla’s reaction to New Jersey cronyism is to criticize Tesla for the benefits it derives from government protection. Tesla’s business intersects with government programs in three areas: (1) taking a DOE-guaranteed loan of $465 million during the financial crisis, which has been paid back in full (and was smaller than the multi-billion-dollar loans to the Big Three); (2) the federal $7,500 income tax credit to individuals purchasing electric vehicles, from which all manufacturers of electric vehicles benefit and which is probably not decisive at the margin for Tesla’s high-income target customers; (3) revenue arising from the existence of a regulation-generated market for vehicle emission credits (ZEV) credits in California, in which Toyota and Nissan also sell ZEV credits to GM and Chrysler. I expect that being practical and not leaving money on the table is a sufficient motive to induce Tesla’s management to engage in those programs. But these benefits from government social engineering and regulation differ in kind from the kind of industry-protecting regulatory cronyism evident in New Jersey (and Texas, and other states forbidding direct-to-consumer car sales).

Take a gamble on “The Bet”: It is a balanced history of the Simon-Ehrlich conflict on population and scarcity

Paul Sabin, “The Bet,” Yale University Press, 2013.

Paul Sabin’s The Bet offers perhaps the best-researched, best-written and most thorough account of the history and meaning of the famous 1980 bet between population pessimist Paul Ehrlich and resource optimist Julian Simon. Sabin is unceasingly fair in his treatment of the antagonists, a tough trick to pull off when working with such charged material.

In fact I’d say Sabin is too fair to Ehrlich, who predicted famine and social collapse in the 1960s, 70s, 80s, and 90s and recommended policies that (inadvertently / unintentionally / because he didn’t know better) would have helped cause those calamities.

The book is recommended if you are interested in population, natural resources, or environmental policy.